fiscal policy options that governments have as a means to controlling the economy

8/8/2019 Fiscal Policy Options That Governments Have as a Means to Controlling the Economy.

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Fiscal System Fiscal system refers to the mechanism through which financial resources

for the government and its agencies are procured, channeled or raised, andthe scale and pattern of allocation of such resources is determined

Fiscal Policy : State policy dealing with Public Revenue, PublicExpenditure & Public Debt

Fiscal Deficit :Net Borrowings of all kind by Govt.

Revenue Expenditure: Expenditure of recurring nature incurred year afteryear. e.g. Civil Administration (Police, judiciary etc.), Defence, Publichealth, Education, Law & order etc.

Capital Expenditure: Expenditure of non recurring nature incurred on

Buildings, multi-purposes projects, buying of capital Equipments,

Machinery etc.


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Features of the Indian fiscal system

Budgetary Parameters

Link between budgetary allocations and the

public sector plan.

Forms and channels of central budgetary

transfers.


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Objectives of fiscal policy

To mobilize recourse growth

To promote economic growth

To ensure economic stability To ensure equitable distribution

To increase employment opportunities.


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Types Of Fiscal Policy

FISCAL POLICY

Discretionary policy

Non-Discretionary

Policy

Personal Income taxes

Transfer Payments

To cure Recession To Control Inflation

Corporate Income taxes

Corporate Dividend policy

Increase in Govt Expenditure

Reduction of taxes

Raising Taxes to Control

Inflation

Disposing of Budget Surplus


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Fiscal Policy Scenario In India

The Global crisis indicated the need to increase government spending toboost aggregate demand. Therefore, The government introduced fiscal

stimulus packages in FY09 equivalent to 3.5% of the GDP, mainly in two

phases.

Expenditure as a percentage of GDP increased to 17.5% in FY09.

In FY09, revenue receipts declined to 10.5% of the GDP due to a decreasein imports and domestic sales.

The fiscal deficit jumped from 3.3% of the GDP in FY07 to 8.0% and 7.0%

in FY08 and FY09, respectively. As per RBI, the deficit in FY10 is

expected to be 6.8% of the GDP, followed by 5.5% in FY11.

The fiscal deficit is expected to decline to 5.5% in FY11 as the payments of

salary arrears to government employees will be completed and revenue

receipts.

Two issues with Indias Fiscal policy: increasing deficits and

decreasing transparency


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FISCAL POLICY OPTIONS- Counter

Fiscal Deficit

Budget- Revenue Deficit and Fiscal Responsibilityand Budget Management Act (FRBMA)

Fiscal stimulus- Interest Rate Cuts

Taxation- Rationalisation of Tax Regime

Government Borrowing- Crowding out of privateinvestment

Public Expenditure- Disinvestment Deficit Financing-

Gradual adjustment from the fiscal expansion


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-20,000.00

-10,000.00

0.00

10,000.00

20,000.00

30,000.00

40,000.00

50,000.00

60,000.00

70,000.00

80,000.00

General government

revenue

General government total

expenditure

General government net

lending/borrowing

General government gross

debt

Gross domestic product

corresponding to fiscal

year, current prices

2009

2010

Rs. Billions

Source: International Monetary Fund, World Economic Outlook Database, October 2010


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SubjectDescriptor Units 2009 2010

General government revenue Percent of GDP 18.907 18.709

General government total expenditure Percent of GDP 28.534 27.884

General government net lending/borrowing Percent of GDP -9.627 -9.175

General government gross debt Percent of GDP 74.205 71.841

Current account balance Percent of GDP -2.884 -3.083


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Debt ratio international comparison

mapPublic Debt/GDP in %

Source: Wikipedia. CIA The World Factbook. 2007 estimates.


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WHAT ARE CONSEQUENCES OF FISCAL

POLICY?EXPANSIONARY:

CROWDING OUT

Govt. borrows money to

finance increased

spending

Interest rates increase

Private Investment

Decreases

Deficits increases

CONTRACTIONARY:

CROWDING IN

Govt. cuts spending, so

demand for loans falls

Interest rates decrease

Private InvestmentIncreases


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FISCAL POLICY IN AN OPEN ECONOMY

A. Shocks or changes from abroad will cause changes innet exports which can shift aggregate demandleftward or rightward.

B. The net export effect reduces the effectiveness offiscal policy by offsetting its effects. For example:

1. Expansionary fiscal policy may increase domesticinterest rates, which can cause the dollar toappreciate and exports to decline.

2. Contractionary fiscal policy may reduce domesticinterest rates, which would cause the dollar todepreciate, and net exports to increase.


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fiscal policy options that governments have as a means to controlling the economy

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